How a Bridge Loan can Help Home Buyers
Anyone who currently owns a home and would like to buy a new one knows how hard it is to juggle buying and selling properties at the same time. To help ease this trouble there is an option to get a bridge loan. This loan is only for a small period of time and allows a homeowner to buy a new property and use their old home as collateral for the process. It can make the processes of buying and selling at the same time much easier to handle.
The Loan
There are a few terms that people use when referring to a bridge loan. Some call it a “wrap” or even “gap financing” because they are loans that are used to finish one real estate transaction before completing the second one. It is a good option for those that cannot afford to pay on two mortgages at once or for those that may not qualify for the new loan with the existing mortgage payments.
Lenders do not like to provide a borrower with multiple large loans at a time due to the financial risk. However, lenders do realize that a homeowner who is going to sell a previous home will not be under the burden of multiple loan payments long. Using the bridge loan helps to cover the time between the purchase of the new home and the sale of the old one.
Specifications
A bridge loan will not be for the full amount needed. It will usually cover up to eighty percent of the values of both of the properties. The last twenty percent will need to be provided by the homeowner. This can be in the form of cash out of their own pocket or even by using home equity. After the sale of the first property, the bridge loan will be paid off and they can apply for the long-term mortgage.
These loans are not meant to be more than a year so many lenders will charge a higher interest rate. But they can be processed quickly – sometimes in just a few weeks. This allows a homeowner to make a purchase and start the process to sell their home within a few months. Which is beneficial so they can begin preparing to get their long-term mortgage with a better interest rate right away.
Why It Is Good For Some and Bad For Others
Many homeowners do not like to see offers with contingencies attached. To avoid using a financing contingency when making an offer on a home a home buyer may use a bridge loan. This allows the home buyer to buy the home without worrying about getting the financing complete before closing the sale.
The problem with bridge loans is that not many people are able to use them. To qualify for a bridge loan the person must have a credit score that would be described as “excellent.” Plus, their debt-to-income ratio will need to be as low as possible.
Selling the Original Property
The major concern with a bridge loan is that the homeowner cannot sell their first property. If they are unable to sell the property they will be stuck paying huge mortgage payments for a long period of time and paying a lot of interest on this loan. If they are unable to handle these payments long-term or if they are not able to pay the full amount by the end of the loan they may lose the properties to foreclosures.
Weighing the pros and cons of any real estate transaction is a tough thing to do. A homeowner needs to be sure of their ability to sell their home before they decide to use a bridge loan. For those that can quickly sell their home after they purchase another property, it can be an easier way to get through that time period.